New FICO auto score screens out more buyers

Lending tool looks more closely at borrowers

By Dana Dratch

You may think you're ready for a new set of wheels. But your new credit score could have other ideas.

FICO has unveiled a new scoring system for auto loans, and the first lenders will start using it in a couple of weeks, according to Tom Quinn, FICO's vice president of scoring.

One credit bureau, TransUnion, began making it available in March 2009. Equifax and Experian are expected to follow later this summer, he says. According to FICO press releases, the new scoring model "will identify 5 to 15 percent more potential delinquencies."

Good or bad? Hard to tellIs this change good news or bad news for consumers?

Hard to tell, according to experts. "The important thing that consumers have to understand is that scoring models aren't that transparent," says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. "So we don't know if this is better or not."

The reason: FICO score formulas are proprietary (think secret recipes for KFC or Coca-Cola), so no one outside the company knows exactly what goes into them.

Your generalized FICO score measures your risk with credit in general, based on your credit report. You can buy your generalized Equifax and TransUnion FICO scores at MyFICO.com. You can also get generalized (but nonFICO) Experian scores at Experian.com.

FICO also works with the credit bureaus to produce industry-specific credit scores, says Craig Watts, public affairs director for FICO, the company formerly known as Fair Isaac. These are used by certain industries, like banks, auto lenders and mortgage lenders and are designed to more accurately reflect a consumer's creditworthiness in a select area or areas. The bureaus provide these scores only to businesses and lenders, not consumers.

So how close is the score auto lenders use to the generalized one that you can buy?

"For the overwhelming majority of consumers, the auto industry score will be relatively close to the [generalized] FICO score," says Quinn. "There is a percentage of the population that will be different. And that's why lenders have opted to use the other [auto industry] score."

New scoring model for auto lenders
Some auto industry watchers see this year's release of the auto industry score as a positive step for consumers. "I think it's a great move by FICO because they've got to find a way to fine-tune the score to address the current credit environment," says Bill Gerhard, director of financial services for the American Automobile Association.

Some consumer experts, too, believe that the new auto scoring model will be better for consumers.

Evan Hendricks, publisher of the "Privacy Times," is cautiously optimistic, though he would like more information on what criteria will eliminate the additional 5 to 15 percent of delinquencies. "Given the lack of transparency about the criteria, it's difficult to say if it's better for consumers," he says. "It's probably an improvement. That said, auto dealers have their own concerns right now. Since most auto dealers are watching their backs to see if they'll be in business, this is not at the top of their priority list."

A new look at old behaviorAt this point, most lenders are still using the old score. "Typically, when a new version of the score is released, the lending community will conduct a score validation exercise," says Quinn. And "the bureaus will allow the support and release of both versions."

That's where TransUnion and its client lenders are now, he says. But some lenders will likely be using the score to underwrite loans "in the next couple of weeks," he says.

FICO rolls out new scoring models every two to three years, says Quinn. After a new model is introduced, "usually within 12 to 24 months, the majority (of lenders) have made the transition," he says.

Is FICO's new auto industry score more conservative than the old one? At this point, even FICO doesn't know, says Quinn. But the new model will look at a few consumer behaviors a little differently.

Recent data has shown us that consumers who carry high levels of debt are more risky than they were in previous samples.

-- Tom Quinn
FICO vice president of scoring

"Recent data has shown us that consumers who carry high levels of debt are more risky than they were in previous samples," he says. So those consumers will lose more points than they would have under the old model.

The new model is also better able to differentiate between consumers who have minor delinquencies, and those who are sliding into financial free-fall. "What that can mean for some consumers is that they may not be losing as many points for having minor delinquencies," Quinn says.

Is it more difficult to snag a good score under the new scoring system? "It's pushing people both ways," says Quinn. "It's a trade-off."

Since lenders themselves will set the thresholds for various rates and loans, the impact on a consumer "will be unique to each lender," he says. Consumers will need to take that into consideration when shopping for vehicle loans.

Rosemary Shahan, president of Consumers for Auto Reliability and Safety (CARS), wouldn't mind a more conservative scoring tool. "You don't want consumers getting into cars they can't afford," she says.

But Shahan would also like consumers to have more information about how the score is calculated, as well as access to the auto industry score before they buy. "In California, at the time you're buying, the dealer has to give you a copy of your score in writing," she says.

Make it work for youAnother difficulty for the car-buying public: For the next year or two, you don't know which scoring model your lender is using.

Buyers can make that work in their favor by comparison shopping for financing, says Gail Hillebrand, senior attorney with Consumers Union. That way, they gain the advantage of getting some loan offers based on the new score and some on the old one.

"Contact a credit union and a couple of banks and get your own rate estimates," she says. See if the dealer can beat your best offer. And if you keep all your applications within a 14-day period, it counts as only one loan application on your credit report.

Shopping around has "always been good advice," says Hillebrand. "But it might be even more important now."

Published: June 16, 2009

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